Some absolutely love their credit cards and do almost all of their spending on them.
I am one of those people.
However, I know that credit is not for everyone and that there are many out there who understand the importance of a cash budget.
A cash budget is when you pay for the majority of your purchases in cash. Of course, there are certain expenses that you may not be able to do that for or that you may not want to do that for, such as with a mortgage payment. For the most part, though, any and almost all spending is done with cash when a person is taking part in a cash diet.
You can read more about how the cash budget method works in the article Dave Ramsey’s Envelope System. There are also cash envelopes and wallets that may make it a little bit easier for you.
While only the tiniest bit of work has to be done to prepare a cash budget each month, big benefits can usually be seen.
There are many reasons for why you may want to take part in an all cash budget as well. Even if you only do it for a month or two, I’m sure you will learn a lot about your spending behaviors that can help you well into the future.
Continue reading below to read more about the importance of a cash budget.
A cash budget forces you to think about where your money is going.
Realistically, there’s only so much cash a person would want to have on them.
By only carrying what you think you will need when you go to the store, you will think about your spending a little more closely because there’s only so much money you can spend.
This situation is quite different from when you have a credit card on you because you may “reason” with yourself that more spending can be done. This is because with a credit card, your credit limit may be much higher than what you can actually afford.
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A cash budget can help you save for retirement.
When you have a cash budget, you have to take out a certain amount of money at the beginning of each month in order to prepare for your monthly expenses.
At the same time you do this, you can also transfer money into your savings or retirement accounts and pay yourself first.
This is easier to do with a cash budget because you will have already calculated exactly how much cash you will need for spending and, therefore, you will know how much money you should be saving each month.
Paying yourself first has many benefits. The great thing about doing this at the beginning of the month before you do any spending is that you will be forced to save a certain amount of money. If you tend to just save whatever money you have left at the end of each month, you may find yourself saving much less.
Paying yourself first will also force you to stick to your cash diet even more since that is all you will have!
A cash budget can prevent impulse shopping and clutter.
Similar to a no spend challenge, carrying only cash can prevent impulse shopping.
This is due to the fact that with a cash budget, you only have so much money to work with each month. If you spend all of your cash, then you would have nothing else to work with for the rest of the month. Having a spending limit can help you separate your “wants” and “needs” when you are at a store.
You will have to carefully plan out each purchase, each time you go to the store, and so on when you have a cash budget.
By planning ahead, you can prevent impulse spending and clutter!
Spending money causes pain.
I recently read that people actually experience pain when they spend cash. It’s much more difficult to spend $100 or $1,000 in cash on something than it is to just swipe your credit card.
Even if you usually pay for everything with a debit card, actually paying for a purchase in cash has a psychological impact on people.
A cash budget may help you save more money for this very reason. It may also give you more of a reason to look for products that are a better value so that you can spend less cash.
Do you think sticking to a cash budget could help you save money? Why or why not?
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I listen to Dave Ramsey in the mornings driving to work and he seems to make a lot of sense. If I made the money some of the people on his show claims to make, I don’t think I would have as many credits cards. With that said I am trying to work on my spending, trying to cut back using credits cards and even have a set plan after the holidays to make a new. Taking some of Dave’s advice and putting them in place in my life. But I think that the cash only spending is a very good idea, made me think twice and may try that too. Just wanted to say thanks for all your hard work. I enjoy visiting your site. Great job.
Thanks!
I do experience pains when I pay with cash! I guess it’s the pain of watching your money physically leave you. Haha. When I can only pay with cash when I’m out of the country I do watch my spending because that is all I have to use though.
Haha yes!
I know all of the pros, I just can’t come around to the idea of carrying around all of that cash, actually walking inside a gas station, and rolling coins again…no thanks!
Well, I don’t think you actually carry around that much cash. You keep most of it at home 🙂
Much easier to do with a family of two! My grocery bills are like small car payments. 🙂
I actually think most people who have cash budgets have larger families 🙂
Cash diet is essential when you are on a budget, if you pay aways with cards well you can easily overspend and have no leftver money before next paycheck, while if you have abudget and pay cash always you will think several times before spend that money. You can use cards but having limits on it.
Thanks!
Thanks Steve!
Great points about a cash budget…although the rewards payoff for use of credit cards and rewards program portals, which require credit card use, are toooo yummy for me to overlook. The key is to payoff the cards every month otherwise the interest offsets all of those benefits.
That said, a “candy box” with a little cash has worked in the past for me to maintain a strict budget. Good post. Really got people talking about it!
Yes! Thanks!
Michelle can you do an article on the credit card rewards programs you use and recommend the most?
That’s a good idea! I’ll have to do that soon.
Thank you! I don’t even want to try it for fear of getting the wrong cards!
All great reasons to use cash. My wife and I are big believers in a cash budget.
I think the biggest benefit is how it makes Opportunity Costs more apparent. When you use cash, you see (and feel) money going to one thing which means that money CAN’T go to another thing. Credit (even debit) cards give us this illusion that opportunity costs dont apply; that a starbucks coffee isnt related to a vacation, or a car, or a house, and so on. But in reality, nce a dollar is used its used. Understanding this has helped us spend more wisely.
Thanks Luke!
We switched to cash about 2 years ago. Before that we were using credit cards and paying them off every month. I thought that the cash system didn’t apply to us because we were always paying off our cards and had savings. Boy was I wrong. Cash has made a huge difference. We have paid off twice as much. I agree with the psychological impact. Another thing I wasn’t expecting was the impact that the balance of our credit card had each month on me and my husband. We would get upset seeing that big number every month. We switched to cash and even though we were spending the same amount we didn’t have that oh that’s a lot of money feeling every month looking at the credit card bill.
I just can’t say enough good things about the cash system. I love it so much I started making my own pretty envelopes. I even sell them on Etsy. If you have a chance stop by and take a look.
I’m trying cash for a while because I want to see what the difference is. I’ve already made an impact on my debit spending when I keep a ledger like what we would do back in the era of writing checks. On debit I was making too many small purchases. Credit isn’t a real issue for me, I have a card or two but use them very rarely.
Not doing the churning thing until I have a significant large cash reserve built up. Not making enough to meet net spend for that anyway. I’m saving my Chase applications up for when they might mean something.